Brief Equities Bottom-Up: Thai Telecoms: Slowdown in Mobile Business Continues. and more

In this briefing:

1. Thai Telecoms: Slowdown in Mobile Business Continues.
2. China Tower. How Far Will It Rally?
3. Philippine National Bank – The Beginning of Recognition
4. After You Looks Beyond Thailand For Opportunities
5. China Blood Products: Deals Highlight Values

1. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.

2. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

3. Philippine National Bank – The Beginning of Recognition

It has taken some time, but finally Philippine National Bank (PNB PM) is being recognized by the market.  To us though, this is only the beginning. The story with PNB has for a long time been about a turnaround, moving from a sleepy state-owned bank focused on large corporate loans and with a high level of bad loans, to a more invigorated bank with far better credit quality and a new focus on the consumer.  The recent milestone of paying a special dividend was a clear sign of how the bank improved since the Asian Financial Crisis (AFC).  The market is now awakening to what a new CEO can do with PNB and one who comes from HSBC Philippines. Still PNB’s market capitalization is only 9% of assets compared with 14-20% for the largest three peer banks. There appears a lot more to come. 

4. After You Looks Beyond Thailand For Opportunities

We met up with management of two companies whose industries couldn’t have been more different. This is the quick run-down on what they are up to recently:

• After You posted 14% earnings growth on the back of 20% revenue growth. While this remains healthy, it realizes that domestic market opportunities will become more limited and has started to look abroad with HK as its first market.
• Locally, the desserts leader is still planning a slew of new products and some in exclusive partnerships with various airlines such as Air Asia and Thai Smile.
• In an effort to reduce storefront expenses, they will start selling certain products outside stores and even online, now 3% of total sales.
• Amata’s earnings crashed 28% in 2018 on the back of 2% revenue decline, as Vietnam retroactively forbid certain land sales and even fines the company for past transactions that abided with the law back then!

5. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.